by Edward C. Kelleher
Working closely with industry representatives, The Depository Trust Company (DTC) is deploying metrics to bring new efficiencies to the processing of non-structured securities such as corporate and municipal bonds and equities. This effort targets the performance of paying agents, vendors, underwriters and DTC’s own Asset Services group.
“We’re building upon what we’ve learned from working with paying agents on structured securities – asset-backed securities (ABS) and collateralized mortgage obligations (CMOs),” said Cheryl Lambert, DTCC managing director, Asset Services. “This is a market where payment data problems were responsible for billions of dollars in late payments to hundreds of thousands of investors each year.”
“We began by publishing a monthly report card so agents could track their own performance against other leading paying agents,” said Lambert. “And then we took it a step further by introducing Six Sigma metrics into the mix. This effort has reduced expenses and risk for the structured securities industry and improved the overall performance of the various parties involved in processing these securities.”
Following the success of the structured securities effort, DTC turned its sights on non-structured securities, such as corporate and municipal bonds and equities, and developed Sigma metrics to measure the performance of paying agents and underwriters, as well DTC’s own performance in all asset servicing areas.”
The Six Sigma methodology emphasizes a metrics-driven set of quality management tools designed to deliver world-class performance and reliability.
Initially, structured securities agents could only see statistics on their individual performance and how they compared to their unidentified peers. In 2008, the agents and the industry task force they supported agreed to full transparency, and DTC published the report card on its website.
Numbers get everyone’s attention
“The rationale behind opening up the results to the entire industry is that when you make metrics visible, it gets everyone’s attention,” said William Scotto, DTCC director, Business Reengineering and Quality. “Metric improvements tend to be better and come faster, and the process becomes a continuous one.”
Following the success of the structured securities effort, DTC turned its sights on non-structured securities, such as corporate and municipal bonds and equities, in 2009 and developed Sigma metrics to measure the performance of paying agents and underwriters, as well DTC’s own performance in all asset servicing areas. These areas include Underwriting, Dividend Announcements, Cash Processing, Redemptions, Reorganization Announcements, Reorganization Processing and Global Corporate Actions.
Six Sigma within DTC
To measure the performance of its asset servicing groups, The Depository Trust Company (DTC) developed Six Sigma metrics around both accuracy and timeliness. Timeliness defects include late rate postings, late file updates and late fund allocations. Accuracy defects include data-entry, calculation and data-interpretation errors, as well as incorrect account allocations.
"We’ve made substantial progress in all asset servicing areas this year and are well above our Six Sigma targets," said William Scotto, DTCC director, Business Reengineering and Quality.
For the first five months of 2010, the defect rate for overall accuracy and timeliness for all areas of asset servicing has dropped an average of 15%, compared to the first five months of 2009.
Going forward, DTC will continue to partner with agents and underwriters to foster constant improvements across all end-to-end processes serving customers, Scotto said.
Non-structured securities showed dramatic improvements in all areas after metrics were introduced. For example:
- Late rate information saw a 40.6% reduction from 4Q2009 to 1Q2010, representing an average reduction of late rate information on 300 payments per month.
- Inaccurate rate information saw a 23.8% reduction for the same time period with an average reduction of inaccurate rate information on 98 payments per month.
- Improvements for both structured and non-structured securities included:
- Incorrect principal and interest payments dropped 39% in the first four months of 2010, which meant that correct allocations increased by $2.7 billion.
- Late principal and interest payments fell by 16% in the first four months of 2010.
Dramatic improvements by underwriters also were recorded in the timeliness of new-issue eligibility information received by DTC. Statistics comparing the average reduction in late-issue information in asset classes for February through May 2010 compared to January 2010 showed:
- A 50.6% reduction for municipal issues.
- A 49.9% reduction for equity issues.
- A 48.9% reduction for certificates of deposits (CD) issues.
- A 44.5% reduction for corporate debt issues.
- A 10.4% reduction for collateralized mortgage obligations issues.
The overall average reduction for all asset classes was 47.6%.
To sustain these gains, DTC has launched a pilot program that will set targets for specific metrics, such as late or inaccurate rate information, with a select group of core paying agents and leading underwriters. There will be no individual targets for either the agents or the underwriters, just core group targets for each metric, Scotto said.
The pilot starts in July and runs through October 2010, providing a baseline to finalize the 2011 targets for both agents and underwriters. @